Sports Direct in Audit Limbo

Mike Ashley’s high-street giant Sports Direct has asked the UK government how it would react if it was unable to appoint an auditor, following audit firm Grant Thornton telling regulators that it intends to quit.

The accountancy firm has audited Sports Direct since it floated on the stock market in 2007, and is currently facing heavy scrutiny following the collapse of Patisserie Valerie.

If it is unable to appoint a new auditor, Sports Direct would become the first major listed retailed to find itself in such a situation.

The retailer has played down Grant Thornton quitting, both issuing a joint statement saying that Sports Direct “has a longer term aim of looking to engage a Big Four auditor in the future”.

The statement read: “In line with the audit profession as a whole reviewing their client portfolios for, amongst other reasons, audit profitability, during a period of increased regulatory scrutiny, Grant Thornton’s review of its client portfolio alongside Sports Direct’s future intentions on engagement of a Big Four auditor has led to a decision by Grant Thornton to not seek reappointment as Sports Direct’s auditor.”

However, reports suggest that all members of the Big Four – Deloitte, EY, PwC and KPMG – are all reluctant to audit the retailer due to conflicts of interest.

Deloitte has already done work for Sports Direct, KPMG’s existing portfolio rules them out, EY has a role on the House of Fraser administration (now owned by Mike Ashley) and PwC has reservations following recent fines and the company’s ownership structure.

Sports Direct said in a report: “We do not believe a firm outside of the Big Four will potentially be able to cope with such an audit in the future.”

As secretary of state for the department of business, Andrea Leadsom has the power to appoint an auditor for Sports Direct under the UK Companies Act if it fails to appoint one itself, but a source close to discussions between Sports Direct and the government has said that this process was “completely untested”.

This has raised concerns among the Big Four firms, with one chief executive of a firm saying there were unanswered questions about the possibility that firms could be forced to audit Sports Direct, and the ramifications of this.

Grant Thornton’s exit as Sports Direct’s auditing firm comes as large UK auditors are preparing to separate themselves from risky or unprofitable audit clients, but could represent an opportunity for smaller firms, such as Mazars, who have reportedly approached Sports Direct to take the reigns from Grant Thornton.

PwC to manage Northern Rock assets

PwC has won a £16.5m contract to manage the UK government’s leftover assets in Northern Rock, despite the firm having been accused of complacency in its audits of the failed bank following its collapse in 2007.

The firm will take control of UK Asset Resolution (UKAR), which was a bank set up to sell Northern Rock and Bradford and Bingley assets following the financial crisis of 2008.

The appointment comes 10 years after PwC was criticised over its failure to highlight the risks involved in Northern Rock’s business model, and for a conflict of interest as the firm helped Northern Rock sell off its mortgage assets at the same time it was responsible for the bank’s books.

The contract, worth £16.5m, runs until 2030, but the holding company will remain under government ownership, according to a UKAR spokesman.

Baroness Sharon Bowles, former chair of the European Parliament’s economic and monetary affairs committee, said the appointment of PwC “is not as sweet-smelling as you would like it to be”.

She said: “The appointment process and the contract, including what potential conflicts of interest were considered and safeguards that were put in place, merit more transparency.”

UKAR initially had more than £100bg in remaining Northern Rock assets, but by April this year this number had been reduced to £8bn after a run of asset sales.

Deloitte reported to FRC

The founder of the now-collapsed telecom network H2O has reported Deloitte to audit regulators.

Elfed Thomas, the founder and former Chief Executive of H2O networks, submitted a report alleging potential negligence by Deloitte during the Big Four firm’s time as auditor in which a £160m financial fraud took place.

Deloitte was appointed in 2003 and has been accused in Thomas’ report, submitted to the FRC, of not being thorough and missing key issues in H2O Network’s 2009 and 2010 accounts.

He claims that a more thorough audit could have uncovered the fraud and prevented the collapse of the company which was once seen as a potential challenger to BT and Virgin Media before it collapsed into administration in 2011.

Thomas, who commissioned a forensic accountant to evaluate the firm’s auditing performance, told the Financial Times that they were supposed to be his “sense checker”, and has reported the firm.

KPMG removed head of UK consulting unit

KPMG has ousted the head of its UK consulting unit following an investigation into his conduct on WhatsApp, making him the third senior partner to be investigated by the firm this year over claims of misconduct.

Tim Howarth was the head of UK financial services consulting at KPMG and had worked for the firm for 15 years before being dismissed after KPMG convened a disciplinary panel on Friday.

Howarth, 53, was the lead partner for one of the firm’s largest clients, Lloyds Banking Group, and ran KPMG’s risk consulting practice.

KPMG said: “We hold all of our people to a very high standard and take swift and appropriate action against any individual whose behaviour contravenes the firm’s values. As part of this commitment, we can confirm conduct issues have been raised related to a partner and, following an internal investigation and disciplinary panel, that partner has left the firm. Under our process the partner has appealed.”

Howarth said: “I am surprised by the KPMG announcement of the outcome of a disciplinary panel, which is bizarre as the decision is under appeal. I have not been given the reason for that decision. I had already resigned from the KPMG partnership. I did not believe that the process was fair or would lead to a just outcome. There is no complainant and there were no formal allegations pursued by anyone.”